Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Quantum (NYSE:QTM)

Q1 2013 Earnings Call

July 31, 2012 5:00 pm ET

Executives

Shawn D. Hall - Senior Vice President, General Counsel and Secretary

Jonathan W. Gacek - Chief Executive Officer, President, Chief Operating Officer and Director

Linda M. Breard - Chief Financial Officer, Chief Accounting Officer, Senior Vice President of Finance, IT and Facilities

Analysts

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Cindy Shaw - DISCERN Investment Analytics, Inc

Brian Freed - Wunderlich Securities Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation First Quarter 2013 Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, July 31, 2012. I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead.

Shawn D. Hall

Thank you, and good afternoon, and welcome. Here with me today are, Jon Gacek our CEO; and our CFO, Linda Breard. The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for one year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunities and priorities, anticipated product launches and plans, and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today's press release, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 14, 2012. These risk factors are incorporated by reference into today's discussion, and we make -- undertake no obligation to update them in the future. With that, I'll turn the call over to Jon Gacek.

Jonathan W. Gacek

Thanks, Shawn. Welcome to our fiscal 2013 Q1 Earnings Call. Today we reported revenue of $140.9 million and non-GAAP loss per share of $0.04. These amounts are consistent with the announcement of our preliminary results on July 9. Clearly, this is a very disappointing result on both fronts. Although the revenue shortfall was the primary cause of the $0.04 loss. Today, I'm going to address the major factors contributing to our Q1 results and then Linda will provide additional details. I will come back to address our plans for Q2 and the rest of fiscal '13.

Our revenue shortfall was primarily caused by 4 things: first, $6 million or nearly half of the shortfall was due to lower-than-expected results in Europe across all product lines; second, we didn't close forecasted big deals with the non-European portion accounting for another $4 million of the shortfall again across all product lines; third, entry-level OEM revenue was $2 million lower than expected due to a decision by one OEM customer to reduce inventory; and four, we had a one-time change in the basis on which tape royalties are reported and paid by one of the tape media manufacturers which had a $1 million impact on the quarter.

Now, let me say a bit more about each of these 4 factors. In Europe, the $6 million shortfall was due to difficulty closing deals in the last 2 weeks of the quarter. This was across all segments and all products. We believe this is a combination of the economic environment, budget uncertainty and our go-to-market model which relies on a help from channel partners to close deals with end users. We fully recognize that Europe is a difficult market right now and we are increasing our inspection of European deals and driving for more senior end-user contact, especially in larger deals.

Not closing forecasted big deals was part of the issue in Europe but was also a challenge in other reason -- regions most notably North America. We saw it across all our product lines but in -- it was particularly the case with Enterprise DXi. Basically, I'd say that in this economic climate, the bigger the deal, the higher the risk of a purchase not getting funded and appeal not being issued regardless of the size of the entity or geography, and we certainly saw this in Q1. Also, the bigger the deal, the greater the need to be close to the end user which, as I mentioned earlier, is harder with a channel-centric model such as ours. In short, this reinforces both the need to be working more deals, so if a deal falls out, we have others to work on closing and the need to get deals closed as soon as possible during the quarter. As I said earlier, not counting Europe, our inability to close big deals impacted our Q1 revenue by approximately $4 million.

The shortfall in OEM revenue was a unique situation with one of our OEM partners who lowered their forecast and revenue by $2 million during the quarter. This involved a low-end, low-margin product but impacted us at the revenue line. We believe this is a reflection of the economic climate and we have now taken necessary steps to validate our OEM partners' plans early in the quarter.

Finally, our tape royalty was approximately $1 million lower than expected due to a change in the basis on which royalties are reported and paid by one of the tape media manufacturers. This happened during the quarter. This was a one-time event that affected the timing of royalties but not the ultimate amount we will receive. So although it impacted Q1, we will believe -- we believe that we'll be on track for approximately $13 million of tape royalty this quarter.

Having addressed the 4 main contributors of the shortfall, I also wanted to provide a high level reconciliation of the difference between our actual results of $141 million and the $155 million that we expected on a product and royalty basis. So first, the tape royalty was $1 million less for the reason I explained above; OEM tape revenue was $2 million less for the reason I explained above; branded tape was off $3 million, mostly due to the European climate and fewer big Enterprise deals being closed; and fourth, DXi was off $8 million primarily due to weakness in Europe and big deals.

Now before I turn the call over to Linda, I do want to hit a couple of positives from the quarter. First, Disk and Software, including related maintenance, totaled $30.7 million and was up 11% year-over-year despite all the issues I described above. This was driven primarily by StorNext software and appliances. We feel very good about our market opportunity and big data with our technology, and while the DXi results were below our expectations, we still added over 100 new customers and continued to have very strong win rates. Second, tape is far from dead. We were overplan and branded midrange in entry tape automation and the OEMs, other than the issue I described above, had a very solid tape quarter.

In summary, we are not pleased with this quarter's overall results. However, we believe we have identified the issues that we can control and we will improve our performance moving forward. We are focused on driving growth, earnings and shareholder value.

Now I'm going to turn the call over to Linda to provide more detail and color on the results, and then I'll come back to address our plans and guidance.

Linda M. Breard

Thanks, Jon. Before I walk through our results, I would like to refer everyone to the financial statements and supporting schedules included in the press release and on our website. It will be helpful to reference those documents as I comment.

Revenue for our first quarter ended June 30 was $140.9 million compared to $153.5 million a year ago. As Jon said, we had geographical weakness in Europe and also in closing big deals, typically defined as deals in excess of $200,000. The primary driver of the year-over-year decline in product revenue was in our Enterprise business. Both Enterprise tape automation and Enterprise disk space products were down year-over-year. For branded entry and midrange tape automation and disk products, revenues were relatively flat to slightly up year-over-year. In addition, royalty revenue was down $3.6 million from the same period in the prior year. And partially offsetting the declines, big data revenue, which includes StorNext software and related appliances revenue, was up nearly 50% year-over-year. Royalty revenue was $11 million for Q1, compared to $14.6 million in the same quarter a year ago. The largest contributor to the decline was LTO royalties of which half was expected and half was due to the change in the basis on which royalties are reported and paid by one of the media manufacturers that Jon described. Expected declines in DLT royalties contributed to approximately 1/3 of the year-over-year decline. For the quarter, non-royalty revenue totaled $129.9 million of which 82% was branded and 18% was OEM. That compares to non-royalty revenue of $139 million a year ago of which 80% was branded and 20% was OEM.

Looking further, various revenue classification, devices and media totaled $18.7 million compared to $21.1 million in Q1 of the prior year. The primary driver of the expected decline was branded media revenue, which was down $2.4 million year-over-year. In Q1 of fiscal 2012, we experienced higher-than-usual purchases of media due to the tsunami and related issues in Japan. Tape automation systems revenue was $50.5 million, compared to $57.7 million in Q1 of fiscal '12. OEM and branded automation contributed equally to the decline. In our branded business, the largest decline was in our Enterprise tape automation platform where we saw weakness in Europe and North America with fewer territories selling Enterprise automation. The opportunities are there. They just did not close in the quarter. We experienced moderate year-over-year revenue growth in our branded midrange platform while branded entry-level revenue was relatively flat compared to the prior year. We acquired approximately 120 new midrange and Enterprise tape customers in Q1, which we believe is an indicator of our continued market share gain in this category. And in our OEM automation business, Enterprise was relatively flat, while entry and midrange business were down approximately equal amounts in absolute dollars year-over-year. Disk systems, software and related maintenance revenue, which includes our DXi, vmPRO appliance and vmPRO software data protection offerings, as well as our StorNext software and appliances for big data management and archive was $30.7 million in Q1, up 11% from $27.6 million in the prior year. Fiscal '12 of the year filled with new products releases, many of which were in the disk systems and the software category. Revenue from these new products was the primary driver of nearly $11.5 million in total new product revenue we generated in Q1.

Looking more specifically at disk systems revenue, we were down approximately $1 million year-over-year. The primary driver of the decline was Enterprise disks which was partially offset by growth in midrange and entry disk systems revenue on a year-over-year basis. We added approximately 100 new disk customers during quarter and our overall DXi win rate was 50%.

As we have mentioned in the past, big deals coming in and out of a quarter can make for wide revenue swings given the size of our disk systems business. The primary cause of the disk revenue decline was a reduction in the number of big deals in our Enterprise business which were down approximately 60% year-over-year and sequentially. Our Enterprise DXi win rate for Q1 was again higher than our overall DXi win rate of 50%. In addition, it was higher than our Enterprise DXi quarterly win rates in fiscal '12 with the exception of Q4 when we had an all-time high. Midrange disk revenue was up 10% year-over-year, the year-over-year increase was due to the continued competitive strength of our DXi6701 and 6702 product offerings, driving a significant increase in new customer purchasing these appliances. Entry-level disk revenue increased modestly over Q1 of last year. The DXi4601, the industry's first capacity on-demand deduplication appliance, along with our entry-level virtual data protection appliance, the vmPRO 4000, contributed to the year-over-year growth as they continue to ramp.

Over the past several years, we have been very focused on delivering a world-class disk space data protection portfolio. In Q1, the strength of our offerings was again reinforced as the Quantum DXi6000 family won its third Product of the Year Award. Our DXi6700 series of disk backup deduplication and replication appliances was named Disk Product of the Year in the Enterprise category at the 2012 Storage Awards in London.

And turning to StorNext software and appliances. Revenue was up nearly 50% year-over-year. We continue to exhibit strength in our appliances driven by our Enterprise and midrange archive-enabled libraries, which we have found makes StorNext much more competitive in places where we had not been successful in the past. Our StorNext M330 and new M660 metadata controller appliances, along with our Q-Series disk, also contributed to the strong results. During Q1, we added approximately 65 new StorNext customers.

The recent announcement of StorNext 4.3 software, which brings new intelligence features, greater performance and increased scale to managing big data, further strengthens our offerings. Incorporating a new database and supporting up to 1 billion files and dozens of petabytes of tiered storage, StorNext 4.3 pushes the boundaries for file system and archiving performance.

And moving to service revenue, it was $36.1 million in Q1, down slightly from $36.7 million in the same quarter of the prior year. OEM out-of-warranty repair was the primary contributor to the year-over-year decline. And this decline is related to both timing of repair requests and business we exited in the prior year.

Turning to gross margins. Non-GAAP gross margin in Q1 was 41% compared to 43% in the prior-year period. On a year-over-year basis, the decrease in non-GAAP gross margin was primarily due to the decline in royalty revenue which contributes 100% gross margin. Looking at expenses, non-GAAP operating expense totaled $63.6 million in Q1 compared to $59 million in the prior year. Year-over-year, we increase our investment in sales and marketing by $4.5 million. The primary driver of the increase in sales and marketing relates to incremental salaries and benefits from additional investments we have made in the team throughout the past year. In addition, we have increased our marketing programs -- marketing program spent to drive greater awareness and demand. Non-GAAP operating loss for the quarter was $5.9 million compared to operating profit of $7 million in the same quarter a year earlier. The largest contributors to the decline in operating profit on a quarterly basis were the overall revenue decrease, including lower royalty revenues and incremental sales and marketing spend. Interest expense for the quarter was $1.8 million compared to $2.8 million a year earlier. This included cash interest expense of $1.5 million and amortization of debt issue cost of $300,000. The current coupon interest rate for our revolving line of credit, $49.5 million at June 30, is 2.46% and the average interest rate for our total debt will be approximately 3.29% for the quarter ending September 30. For the first quarter, we had other expense of $300,000 due to net foreign currency losses and we recognized tax expense of $500,000, primarily related to foreign and state taxes.

Summing it up for Q1, we had a non-GAAP net loss of $8.6 million which is a non-GAAP loss per share of $0.04. This is compared to non-GAAP net income of $3.5 million and $0.01 in the same quarter a year earlier. Focusing on cash flow for the quarter and the balance sheet at June 30, I would like to highlight several key points. Cash flows used in operations for the quarter were $1.1 million. At quarter end, the composition of our debt was $49.5 million of revolver and $135 million of convertible debt. We ended the quarter with $50.2 million in cash. We are in compliance with all debt covenants at June 30, and we expect to be in compliance with our debt covenants during the next 12 months. EBITDA for the last 12 months was $51.6 million. And on a sequential basis, manufacturing inventory increased $2.5 million, accounts receivable decreased $24 million and we had an accelerated payment of $7.1 million from one customer. CapEx was $4 million. While we fell short of our first quarter plan, the team is very focused on growing revenue in fiscal '13. As Jon would say, we are reviewing the game film, paying close attention to those areas in which we did not achieve our goals and working to improve performance in the remaining quarters. Now let me turn the call back over to Jon.

Jonathan W. Gacek

Thanks, Linda. Clearly, our overall results in Q1 were not what we expected nor the acceptable. Moving forward, there are several positive trends which will continue to build on and there are areas where we need to adjust and drive for a different result. As we analyze last quarter's result and look at the rest of the year, we are proceeding on the basis of 3 key principles. First, we are in the right markets and have a strong product portfolio. Data protection in both traditional and virtual environments is a market that's growing and is at the top of the list of problems our end users are trying to solve. The combination of our Scalar tape, DXi appliances and vmPRO solutions is unique in terms of breadth, depth and flexibility that we can offer customers. The big data management and archive market is also growing. And our strategy of leveraging the industry-leading characteristics of StorNext in a family of appliances is also unique. With the addition of next-generation object storage or wide area storage technology to our portfolio, we believe we will be able to offer customers new unparalleled solutions with incredible value. Second key principle is that the uncertain global economic conditions are impacting customer buying decisions. I spent time on this earlier on the call but to reiterate, there are lots of deals, but the hurdle to close them goes up the bigger the deal. Our go-to-market is through the channel, and we have to make sure we really understand the buying decision process in this economic environment. Finally, given our intention to grow the company, we need to be in more deals. Have more channels to market and have more end-user and channel awareness. This is not a new principle for us and it's something we've been working on but it's clear we must do more. So with these 3 key principles in mind, we are going to do the following as we move forward. First, we're going to continue to drive hard on our unique value proposition with end users and channel partners, specifically enabling customers to maximize the value of their data by protecting and preserving it over its entire life cycle in any environment and in any scale. This includes offering performance, ease-of-use and tight integration of Quantum solutions at a price point that provides more value than the competition. Second, we're going to be more aggressive in building our pipeline and do so earlier. This will be through a combination of targeted marketing and broader awareness activities directed at both installed-base customers and new prospects as well as the channel. Our win rates are very high and when we're in deals, we do very well but with need to be in more deals. Third, we are going to continue to broaden our routes to market, including aligning more deeply with our partners, adding additional partners and pursuing additional strategic or OEM partners for our tape, disk and software products. As an example, building on our partnership with Xerox, we will be launching our Quantum-based cloud data protection offerings later this quarter, leveraging Xerox's cloud services infrastructure. In addition, we have signed an agreement for a large integrator solution provider to standardize on our tape libraries as part of their offering. We expect to announce more details about this arrangement later this quarter. Fourth, we are going to take additional steps to inspect big deals more closely and work to get them closed earlier in the quarter. Fifth, we're going to monitor the economic climate and the uncertainty and adjust our investments and focus accordingly. And finally, we're going to spend wisely. We are still focused on building a growth business and creating long-term shareholder value but we need to be balanced in our decisions around spending for growth and the need to make money. Our intention is to do both.

So now let me turn to guidance. For Q2, we expect revenue of $150 million to $155 million. Non-GAAP gross margin of 42%. Non-GAAP operating expenses of $64 million to $66 million. Interest expense of $2 million and income tax expense of $1 million. Thanks for joining us on the call. We expect better results in Q2, and we'll look forward to taking your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Just 2 for me. Jon, when you think about these Enterprise deals getting pushed, I look back at Data Domain, who is very much a direct-driven organization and Combo which is, obviously, direct-driven outside of Dell. Do you think this segment of the market that you're going after can actually be managed through the channel, especially as these environments get more complex and these bills get bigger? Is this something that can actually just work for you guys or you have to sort of reassess what you're going after?

Jonathan W. Gacek

Yes, I think -- so there's a couple of elements in that question. I don't know a lot about how -- Data Domain and Combo. I thought Data Domain was a channel company but let's set that aside. What we're finding is -- we're very much involved in the technical part of the sale at the end user with our channel partners and I believe that's important and going to continue. But what we're finding is that those individuals are not as clear or as close to what the financial situation is at that end-user and oftentimes they're surprised that deals aren't improved. So I don't think it's really about do we have the right solutions or are the channel partners there. I think it's -- the scale of our deals getting bigger, so you're starting -- it gets escalated farther. This economic environment means more things are getting escalated and we just are not getting enough signals around what the economic buyers are doing with these -- in these partners or in these end users. So we're going to try to address that. I've been spending time with customers. I'm going to spent a lot more so is Ted, so are our 2 GMs. We're just going to get out in front of some of these deals early and make sure we're clear that we fit for them and that there's going to be money because -- especially in the big deals but I'm not concerned about the product set or the go-to-market piece of it. It's really about information flow.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And then -- I appreciate that, Jon. And then, Linda, can you just help -- can you revisit us on the operating margin assumptions between tape and disk and how we should be thinking about that and sort of on a run-rate basis, what are the different margin profiles for both segments?

Linda M. Breard

Yes, well, Alex, we typically don't break out by segment the products -- the gross margin on products. I would say our...

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

I mean operating.

Linda M. Breard

On operating profit, that either. So, obviously, from a tape perspective, that's a very profitable business for us. And the disk business is also a very profitable business for us. I think, overall, if you were to think about adding $20 million of revenue to the top line, you would -- gross margin would've been up at 42% this quarter and the $10 million would've flown down to the operating profit line.

Jonathan W. Gacek

So I think that's hard. The thing that Linda is addressing there is the lack of revenue is the challenge because the margin in branded tape is good and the margin in disk and software is good. And so when you don't have that and, obviously, margin on the royalty is very good, right? 100%. So it's kind of a math problem, right? If you just -- if you compare this quarter to last quarter, just at a high-level, it's just volume and our fixed cost structure or our cost structure is fairly fixed except for variable comps. So that's the bad news. The good news is that as revenue grows, we get scale really quick the other way too. So when you look at some of our more profitable quarters, you can see, as Linda points out, you add $10 million or $20 million revenue, a lot of that flows through at a really high percentage. So it's why the growth thing is so important. Now in fairness, it's exacerbated when you're investing more on the OpEx side and revenue goes down. And we think that as really about timing around investments. I think our early returns around our new territories and some of our new models, people are pleased with. And I'm sure it's going to come up later so I'll just address it now. We feel good about our overall game plan because we've got a number of our people and a lot of them who had very strong quarters. It's just that our standard deviation between those that are doing great and those that aren't is too big. So I think revenue growth is the best thing here but I try to moderate that in that as things get tougher here, we'll adjust accordingly but we'll get more profitable as we grow, for sure.

Operator

The next question is from the line of Ryan Bergan with Craig-Hallum.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

I was just wondering if you could give us perspective on the back half of the year. If you expect normal seasonality at least sequentially through the back half of the year?

Jonathan W. Gacek

Yes. So historically, for sure Q3 or the December quarters are our biggest quarters. And that's over the last 6 years. This quarter is our -- that we're in is generally our second biggest quarter and that's often been driven by the fed year-end and then product cycles as well. And in Q4, it's historically our second worse or third-best depending on how you want to count it. And at the high level, we don't see any differences in that right now. I'd say our guidance around that $150 million to $155 million doesn't -- I think is less than last year, I know it is. We're driving internally for more than that but I don't feel the need to change anything around guidance until we start proving that we can do better. So we expect a seasonal pattern that looks historically the same and we're driving to move the revenue number up in all those periods.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

All right. And then can you talk about what you're expecting from U.S. federal? If you expect a normal seasonal budget flush from them or if you see any weakness there? And are you more oriented towards larger Enterprise deals with U.S. federal?

Jonathan W. Gacek

Yes. So the answer to that is yes, we are. And we tend to be more program-driven and most of that business works its way through in September, the month of September. Having said that, I was just in Washington D.C. with Janae, who runs the big data group, and there's lots of opportunities right now, and we're in some very good programs and our belief is that we're going to be successful but like everything else -- and it's maybe a little worse in the federal government, the deals come out, they go through the procurement cycle and they pop out. So it's a little bit more tense than commercial space but it's an important space for us on the big data piece, in particular, there's a lot of upside. And actually on DXi as well. I was in Washington D.C., some of our big data customers have also moved to our data protection products as well. So we'll see. We're pensive about all of it because it is an important quarter but there's good opportunity there for us.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

All right. And then your operating expense guidance for the quarter I guess was a little higher than I was expecting but I guess I'm wondering, do you feel like that's the kind of the new run rate here or that's a run rate you can go with going forward where you might see the sequential step up in Q3 and then a sequential step up in Q4 like you have in prior years based off this new operating expense guidance you have given us?

Jonathan W. Gacek

Yes. So 2 questions. So what we try to do here, if you recall, was to front-load the expense to increase the opportunity for growth. That was the goal. So I would say, from a sales and marketing side, at a sort of fixed level, the expense run rate is what you described, we can manage it over the next 3 quarters. And if it goes up, it's going to be because we sold more which everybody will be happy about but it'll be in manageable numbers. So I think $64 million to $66 million, I'm looking at Linda, is probably a good range to think about. And to be candid, I'd like to pay more than that because we know, we blew it out in the quarter. So I think from a fixed perspective, though we're fine and if things got really bad or worse, we have to spend less on a fixed basis. That's not what we're planning on right now, though, at all.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

But at what point do you decide things have gotten that worse and you need to scale back then that sales and marketing spend?

Jonathan W. Gacek

Yes. We're monitoring it closely as I said. We think we're on the right market-markets, data protection and big data, and those are growing. But let's use Europe. If Europe gets a lot worse and we can't execute there because of what's going around, as we know, we'll need to be smart where we're spending money. We actually expanded into some other geographic areas this Q1 and we did very well. So we're going to be pretty active about where we're spending in trying to get the most growth for the cost but I'm not going to just spend money to be spending money. It's not our DNA, it's not how we've run the company, and we're going to be smart about that.

Operator

The next question is from the line of Cindy Shaw with DISCERN Group.

Cindy Shaw - DISCERN Investment Analytics, Inc

A couple of questions. You just said that you're not really planning on spending more on sales and marketing unless there's a lot more revenue in which it would make sense, but earlier on the call, you also talked about, if I understood, doing more with less in terms of stepping up awareness efforts and advertising and things like that. So can you explain how you're going to basically do more without increasing spending?

Jonathan W. Gacek

That's -- so what I was trying to say, Cindy, thanks for helping me clarify it, was it's built into the guidance that Linda gave. Which was the prior question. So our intention of that range that we gave will cover what we're talking about doing.

Cindy Shaw - DISCERN Investment Analytics, Inc

And how do you increase awareness without stepping up the expenses?

Jonathan W. Gacek

So think of it as focusing on the places where we get the most return, where we're getting the most end-user contacts. So if there's a pot of money, we're going to really focus it on driving that specific attribute as compared to, say, general corporate awareness or some other marketing campaign. It's really about driving a specific result around end users.

Cindy Shaw - DISCERN Investment Analytics, Inc

And is there going to be a lot more focus in terms of managing the sales funnel and those types of just more sales productivity type issues?

Jonathan W. Gacek

Yes, we're going to -- Ted and his team has been particularly focused on that. I think we were all surprised that the results and I say that in the most transparent and kindest way even with a week to go, so there's definitely room for improvement. What I try to address on the call was after sitting down with the sales team and going through, why did we think we're going to be here and end up here, we did it deal-by-deal. And in doing so, those trends that I talked about where the things that came out. And so, we're going to take the steps that I mentioned earlier and we're going to get more executive involvement in the bigger dealers -- deals earlier and we're going to drive for a better result.

Cindy Shaw - DISCERN Investment Analytics, Inc

And how long do you think it's going to take to really sort of make that shift in terms of how the company operates? Is that something that is a 1-month or a 3-month or a few-quarter type thing? And at what point will that start to really get the company better visibility, do you think?

Jonathan W. Gacek

Yes, well, so a couple of things. I mean, I think we're trying to adjust to 2 things. One, our business and the types of deals that we're in is changing. I'll use the big data example. We're in much bigger, more strategic accounts. That's good. Understanding the buying decisions around those, we need to improve on. So I use that as an example. The macroeconomic environment is dynamic and we're just taking the position that is tough and it's not going to be easy and so we've got to have more information sooner. So I would talk about the things that we're doing as adjustments to what we see and why we didn't get to where we're going to get because again, this is not where we thought we'd be and I think Linda used the sports analogy which normally is me. We watch the game film, we went through the deals and we're going to do what I said on the call, we're going to take those steps. And again, again, predicting the results is harder. I can tell you that there's a lot of deals, we like the markets, we like the products. We're getting super good feedback around the strategy, around big data. DXi continues to win awards, channel partners continue to contact us, we just added another big tape partner. We're launching our Xerox -- our Quantum-branded cloud powered by Xerox. I mean, we've got -- we have a bunch of things that are really positive so we're not going to hang our heads around where we are but we're not going to be Pollyanna-ish around the things we got to do better.

Cindy Shaw - DISCERN Investment Analytics, Inc

Okay. And can you remind us what sort of a typical linearity for the company would be during the quarter and how that shifts out lately?

Jonathan W. Gacek

Yes. So in total, it's like 20, 30, 50. I'm looking at Linda. I don't think...

Linda M. Breard

It's overall business.

Jonathan W. Gacek

Overall business. It hasn't changed much. But the devil is in the details around that because in that 20, 30, 50, we've got royalty and OEM which is pretty linear and we have service which is pretty linear. The branded business tends to be really back-end loaded, it always has been. And so again when you think about the risk profile for us, starting the quarter strong is great but it really matters how you finish. And I think if Ted were here -- he's out with customers in Asia I think this week. He would say, we've got to be better in getting the deals that we've got on our sights closed, and if we're not going to get them closed, we got to have more deals to go close. And so it's really -- the more we can upload early in the quarter and the better visibility, so we can make decisions about what we do, we just have to do that.

Operator

The next question is from the line of Brian Freed with Wunderlich Securities.

Brian Freed - Wunderlich Securities Inc., Research Division

Jon, I have about 3 questions here so I'll kind of fire away here. First, there's a little bit commentary out there about EMC, a little more focused on tape with their Spectra Logic reseller relationship, I wondered if you're seeing them at all and if the deal slippage in the quarter is at all attributable to that?

Jonathan W. Gacek

Yes. So the -- on a deal slippage basis, no. What -- our relationship with EMC on tape has always been funny because they would sell it as a last resort and it's -- but we've been selling with them for a long time. So what's really happened is we're still selling tape through EMC. It's not very material and it tends to be under their installed base. So that's where we're selling and those are all Quantum-branded systems. So they have our name on them. We carry the service paper and we know where they all are. And so I think the opportunity in selling the installed base still exists. We do see them taking Spectra into accounts from time to time and competing with us. Spectra is a privately held company. They have some interesting products but we have no trouble competing with them given the opportunity we have been for a long time. They -- I don't know how big they are anymore. They're private but it's a different scale. And I just don't think the EMC, Spectra, Quantum tape thing is really the issue.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. My second question, and it relates to the patent litigation out there, and really 2 things. There's been a fair bit of news out today with BDT saying they don't really infringe except in very limited configurations. But going through the complaint, you guys apparently according to Overland actually able -- has to license their 766 patent back in 2010, can you talk -- what can you say about that dispute and, one, your rational for winning the license there?

Jonathan W. Gacek

Okay. Well, that's a new one for me, I don't know. So let me -- I have a -- Brian, I had a canned answer to this but since you asked me that I'm going to have to go off script. They filed a lawsuit on 2 patents, related to tape. I can tell you that we are very well positioned around what the facts are around those patents and our products. We have never asked them for a license. I'm looking at Shawn. That's right. We have never talked to them about a license. And so that's never happened. We have a -- we actually have the largest and the biggest tape automation patent portfolio in the world and we have a lot of experience with dealing with these things and I would just say -- I think the BDT Overland press release conference call thing is sort of funny. There just seems to be a disagreement about what the facts are, which I'm going to let Shawn address here in a second. And then -- at the end and I think the most important thing for us is we're confident in our position and we're confident that our customers aren't going to be impacted and we're going to stand behind our products and our position as we feel we are fine. I don't know exactly if -- how to talk about the BDT Overland. I guess there was a press release today and a conference call. I am not qualified to read what the ITC. I can read it but I'm not qualified to talk about it. So I've asked Shawn actually to give you a quick summary if somebody asks this around our read of what's happened. So I'm -- Shawn, you want to jump in? Save me?

Shawn D. Hall

Sure. I'll just say a couple of things. First, to your comment about the complaint. I would just note there, I know what you're referring to. There is a section in the complaint that suggests that we kind of affirmatively sought a license and that is just not the case. And that will get resolved as the litigation proceeds. But as far as the ITC action, there is a lot of confusion about that. I think each side trying to characterize it in -- take the highlights that favor them. I would just note, we're not a party to the ITC action, and so the results there aren't biding on us at all. I mean the patents that issue in ITC are the same as the patents that are issued in our suit, and so there are aspects of it that are perhaps informative. But it's not binding, we're not a party to it. Specific to the infringement, I would just note that the ITC found that BDT did not infringe the -- either of the patents. I think that's pretty clear and factual. The ITC found that IBM and Dell infringed in kind of limited circumstances but Dell and IBM have both settled. So that's not -- as far as we can tell, very relevant to kind of the current case against BDT was found supposedly not to infringe.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. I appreciate that color. So a jump into my next question, Jon, can you give us any color on quarter-to-date trends? I imagine you acted fairly quickly to try and regroup after last quarter? What are quarter-to-date trends looking like? Do you feel like you're getting off to a good start at least?

Jonathan W. Gacek

Yes, what's horrible about the result in Q1 is Q2 is like the toughest quarter to feel good, regardless of what we just did and that's because it's -- the fed year-end, the stuff pops out in September, you have the European vacation in August and can't leave, the whole world is somewhat on vacation. I would say that we're doing a couple of things. We're really focused on getting these deals that we thought we were going to close closed and to the extent that they're not ready to close, we're working very hard to get them closed and I would just put that under -- we're going to -- we need to do more selling. I think as I compare it to last quarter or a year ago, I think we're -- in the parts that we're focused on, I think we're about the same in total for the branded business. On the parts that we don't control, the royalty is going to be down some and the OEM business would be down based upon the change in the products but we've included -- we've taken that into account as we look at guidance. I'm not -- I mean there's no way I'm going to feel good at end of July regardless of what the number. I'll just put it that way based upon the way this quarter works. So I like the way Ted and his sales team are responding. I like the steps that we're putting in, I like the way we proactively address territories that aren't performing at the level that we need to and that's around coaching and help. So I think if Ted were here, he'd say his team gets it. We see the deals are final, I'm going to look around the room and Bill's here. Funnels are bigger, opportunities are bigger. So that's all good. Now we've got to get deals closed.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. And then my final question. It wouldn't -- when we're out earlier in the last quarter, you talked a bit about your wide area storage solution. And you kind of look at the new products coming out of the gates, that along with your hosted products and cooperation with Xerox. I guess what elements of your portfolio are you most bullish about and what elements are you most cautious about based on early customer interest?

Jonathan W. Gacek

Well, I think. I'm not -- it's just a little bit like talking about your kids. So I'm going to talk about them all in some ways just so you know. On StorNext, I think our strategy around the appliances are right. We're getting -- we see the traction there. We're getting a better customer result and we're getting into more deals. I think the wide area storage addition of the technology is super important. We are driving like heck to be able to launch a product and we're going to probably launch a series of them as what we've decided on here. And we have very modest expectations about the number of deals that we would try and work right out of the gate because we don't a product yet and I would say, we're 5 or 6 times higher than that, what our plans were. So we've got a lot of things that we're chasing and the engineering team is feeling the pressure of getting the products, integrate it with StorNext and test it so that we get a good result for customers. We absolutely think we have something unique with StorNext and wide area storage. And based upon the early discussions, and I've been in a bunch of them, I think that's going to be super important.

On DXi, I think our product portfolio is good. The thing that makes me nervous about it is we're small compared to the reference competitor. We do not mind competing with them at all and when I see them talking to customers about our financial results and our size of our company, it just reaffirms the fact that I think we've got them when it comes to product solutions and the value for the customer. But they're a big formula competitor and we just have to be on our game, we've got to get deals closed quickly and we can't be afraid to compete. And now on tape, the thing that makes me the most nervous on tape is that we're there share leader. We have the best products and that's a business that we should get all the time. And we're adding a lot of focus around the new businesses. I just want to make sure we're picking up all the tape deals that we should get, whether it's in our installed base, whether it's taking them from a competitor, the tape business, that market's not going away, we have the best products, we have the best data protection solution. Our sales team and our channel partners need to make sure we get those deals and so we're doing a lot of -- around emphasis around that. So if I put it in order, I'd say the tape stuff concerns me the most because it's the biggest piece and I just think we got to get it all and I'm most excited about StorNext and appliances. And then DXi is a solid product. There's no reason why we shouldn't sell more than our fair share of that. We just need to be in more deals and Ted and Bill and the team are driving to get us more leads and more of that because when we're -- when we get a chance, we're tough to beat. And then we still have things that haven't occurred yet, right? With the branded cloud offering just comes out. We are pursuing other channel partners. We've -- I loosely announced this new tape thing. We'll have a press release out, more specifics around that here during the quarter. So there's good stuff going on in all parts of the business, we just had a crappy quarter. And we've got to do better.

Operator

The next question is from the line of Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company, LLC, Research Division

So just a quick follow-up on StorNext. That seems to be going well, up 50% year-on-year. Was that up quarter-on-quarter and do you I think you can be growing that a little more predictably quarter-on-quarter as you go through the year?

Jonathan W. Gacek

So let me check in on your first question. The thing about StorNext and the growth is that by doing the appliancesation, Glenn, even those deals are bigger too -- getting bigger too. Because remember, for every $1 of software, there's probably $5 to $7 of hardware when we sell an appliance. Yet I think there's a standard there. We added 60-some new customers?

Linda M. Breard

I think 65.

Glenn Hanus - Needham & Company, LLC, Research Division

65. Yes.

Jonathan W. Gacek

65. Yes. So I think there's a couple of things happening. One, the breadth of the types of people we can sell to is growing. The use cases are growing and the overall deal size is also growing. And candidly, all the appliances are fairly new. So I think with the -- based upon what I see it, when we add the wide area storage to the portfolio because that just makes the deal that much bigger, our ability to sell 1, 2, 3, 4, 5 petabyte-sized deals just exponentially changes. So I think you'll see us grow these next 2 quarters. I think we're -- I think that's the case. We have a lot of installations of StorNext in the federal space so this is an important quarter for them, and then our wide area storage of products they start rolling out here, starting this quarter and into next. So I feel pretty good -- I feel good about StorNext and where we're headed. I like and I've been in a lot of customer meetings with Janae, and we used to call NetApp boxes islands of storage and you have to link a bunch of them together. And what's happening now is with this product, we can call Isilon boxes, islands of storage. The islands are a little bit bigger but we get really big. And we're going to be -- as that product comes out, we're going to have a unique offer. There's nobody who can -- the combination of StorNext's speed and performance and the scalability of wide area storage and the resiliency and the cost is going to be really disruptive.

Operator

[Operator Instructions] The next question is a follow-up from the line of Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Just want to -- a couple of quick follow-ups here. Linda, can you just give us a broad reminder of directionally the gross margin between the products. I know you're not going to give us the exact numbers but can you just sort of give a hierarchy of how the products play out as far as gross margin?

Linda M. Breard

Yes. I mean we don't -- we haven't given that publicly, Alex. So you know I'd look at it and say well, StorNext software is 100% margin, royalty is 100% margin, branded tape disk and software -- branded tape and disk are high margins and then you have OEM business and media device is at -- they're the lowest.

Jonathan W. Gacek

For sure, the royalty is the biggest thing. So when you look at these results compared to a year ago, the margin is really a loss of $3.6 million in royalty.

Linda M. Breard

Royalty.

Jonathan W. Gacek

Losing that big. Disk and software, what we've said is it's like the reference competitor so that's going to be when you put the 2 together, you tape that category, that's going to be next. And then branded tape it would be the next highest and then you get down to OEM and the devices and you're -- it's below the corporate margin.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And, Jon, is your assumptions around the branded versus OEM tape really change as far as how we should be modeling that over the next couple of years as far as branding growing great than the market, and then OEM at some single-digit decline? Is that still accurate or should we be more aggressive on those declines?

Jonathan W. Gacek

I think tape is going to continue to be under pressure at the low end and in backup and it's going to grow in the midrange in Enterprise and in archive. So I think the guidance we've given is trying to reflect that -- to be reflective of that. The reason we do it that way, Alex, is that on the OEM side, we don't control the go-to-market and how they position it. So it's hard to say anything but market which I believe is small declines. But on the branded side, we feel like our ability to sell a DXi, a tape library, all managed by Vision, is a unique offering that StorageTek can't do or I mean I guess historically now, IBM can't do that, HP can't do it. They're probably the closest. Spectra can't do it, a name that was dropped earlier. So we like our competitive position on the branded side and that's why we think we're going to grow better than the market. But I'm not -- IDC, I'm looking at Brad [ph], do we have any new data on market?

Unknown Executive

No.

Jonathan W. Gacek

So it's what we've said in the past.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And just a clarification on the OpEx question from earlier, Jon. Should we just be used to OpEx in the 60s now going forward? Or is there going to be a reset at some point? How should we think about that?

Jonathan W. Gacek

Well, I think the answer to the question is if we're not going to grow or we -- of the -- our market position changes, we can't -- we're not going to spend this much money but that's not what we see right now. We see more around macro things that we got to be wiser about and investments that we've made that haven't yielded results yet and new things that are coming. So for instance, we're doing a lot around StorNext marketing. I am not going to pull back on that because it just grew 50% and when we add this wide area storage technology which we think we are super disruptive in, the percentage is going to look different. DXi, same thing. That market is going to double, according to IDC. We want our fair share of that and we're spending accordingly. Now if for whatever reason, the world changes, we'll adjust. But right now, we're being smart. What I mean by smart is we're spending where we need to but we're not -- I'm not telling the team to go find x amount of OpEx to take out. Because I just don't think the market or our product position dictates that.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And last question. I guess it's back to Linda. You guys have talked about mid-40% gross margin as sort of the target historically. I think you may have talked about that back in May. Obviously, that changes with sort of how the product mix looks quarter-to-quarter but is mid-40% gross margin still a good go-forward target as we model out the years?

Linda M. Breard

Yes, I would say it's really scalable what drives that. I think I said earlier, for every $20 million of additional revenue, you're going to add 1 point to a quarter. So assuming growth from where we were last year and increased scale on that being more on disk and software and branded business, we move towards the mid-40s. So that's how we typically model that out.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And did you guys talk about why the service margin was so high in the quarter? I think it was in the 40s maybe I didn't get that calculation right?

Linda M. Breard

Yes. I know we've been down. I think that's reasonable. We've been down over the prior quarters just related to some costs associated with service inventories and so forth. And that kind of recurred -- returned to normal levels this quarter.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So back -- do you think 40s on the service margin -- low 40s is a reasonable play or do you think high 30s going forward is how we should be modeling it?

Linda M. Breard

Yes. I mean we typically, we've had more quarters in the high 30s than in the low 40s, so that's probably more reasonable.

Operator

[Operator Instructions] There are no further questions at this time. I will turn it back over to management for any closing remarks.

Jonathan W. Gacek

Well, I want to thank everybody for joining the call. We ran over an hour. We felt like we needed to be reflective of what we saw occur in the quarter. I can assure you on behalf of the team, that we spent a lot of time digesting the data and what's going on, and we're going to adjust some things to reflect what we talked about. And our overall goal here is for this to be a growth company. We think we're in the right markets. We think we've got a good product position and we believe we've got more good things coming to take to our customers over the -- or as the course of the year plays out. So we will talk to you in October and you can be assured we're driving for a better result. Thanks very much.

Operator

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 and entering the access code of 4546490 thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Quantum Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts